US Center For Venture Research 2006 Report
Brian Perry
19-Mar-07
As many of us within the angel investment community already know, obtaining data of actual SME early-stage funding is not the easiest thing to do. Because all of these companies are private ventures in the early stages, these early-stage investment rounds are generally not public domain.
Furthermore, as many companies are still in beta or launch mode, they don’t necessarily want the general public and media knowing their business ideas until they are fully positioned with all the capital required. There is also the much less monitored “blood money” of family and friends that can almost never be fully calculated as investment into new ventures. What this means to media sources like The Angel Investor magazine is that we must sometimes rely on either the more public venture capital markets and statistics or the more established and developed US angel investment markets.
Perhaps the most informative and thorough research body within the world of angel investing is the University of New Hampshire’s Center for Venture Research. The Director of the Center is Jeffrey sohl who has been a leading authority on angel and vc investing in the US for over two decades now (see Angels Speak interview with him in our May issue). Because the US leads the way in activity and trends, the UK angel markets can learn from and take this information to greater leverage and understand what is happening on this side of the Atlantic and within our own regions.
In a recent study titled 2006 Angel Market Analysis by the Center for Venture Research, that was released on 19 May, the US claims to have experienced steady growth in 2006 and seeing total investments hit $25.6 billion. Compared to 2005, this is an increase of 10.8%.
In the past year, a total of 51,000 US entrepreneurial ventures received angel funding. Compared to 2005, this number was up by just 3 percent. In terms of the number of angel investors, there were 234,000 in 2005 but not yet calculated for 2006. The sharp increase in total investment dollars compared favourably to the increase in total deals. The average deal size increased by 7.5% in 2006 over 2005 which points to a healthy and growing angel market.
“If the angel market is to achieve sustainable growth, there needs to be a reasonable augmentation in active investors, and thus, level of participation is an important consideration. While the number of angel organisations, and individuals that are members of organised angel groups, is increasing, there is a larger percentage of latent angels (individuals who have the necessary net worth, but have not made an investment),” said Jeffrey Sohl, director of the UNH Center for Venture Research at the Whittemore School of Business and Economics.
Perhaps not a great surprise was Sohl’s finding that healthcare services, and medical devices and equipment accounted for the largest share of angel investments, with 21 percent of total angel investments in 2006. Healthcare was also reported at the top for 2005 showing the industry and interest remains very strong. Following healthcare, software was next at 18 percent along with biotech also at the same 18 percent. After these top three, the majority of the remaining sectors were various high-tech industries.
“Since the angel market is essentially the spawning ground for the next wave of high growth investments, this sector diversification provides an indication of investment opportunities that will be available for later stage institutional investors,” Sohl said.
Something that various advocates and agencies should take much more notice in is the fact that angel investments are a significant contributor to job growth in any country or region. In the United States last year, 201,400 new jobs were created, or four jobs per angel investment. However, this tracks jobs created at the time of the angel investment and thus it is likely that this job creation of 201,400 is the minimum number of jobs created by angels in 2006. The UK would also represent a significant number of new jobs being created and this is something to always consider and promote when looking for any government support for a new initiative or investment. “Since the angel investment is used by the venture to fuel growth, launch new products and explore new markets, it is highly likely that the number of jobs created by the angel investment will increase as the firm grows,” Sohl said.
The report also states that angels continue to be the largest source of seed and start-up capital. A staggering 46 percent of 2006 angel investments were in the seed and start-up stages. Following closely behind seed and start-up investing was postseed/ start-up investments with a total of 40 percent. According to the analysis, this appetite for post-seed/start-up investing continues a trend that began in 2003 and represents a 10 percent increase in historical levels. Given the four-year trend, angel seed and start-up stage investments in the 45 percent to 55 percent range appears to be the reasonable range for the foreseeable future, according to the analysis.
“While angels continue to represent the largest source of seed and start-up capital, market conditions and the capital gap in the post seed investing stage are requiring angels to engage in more later-stage investments. New, first sequence, investments represent 63 percent of 2006 angel activity, indicating that some of this post seed investing is in new deals. This restructuring of the angel market has in turn resulted in fewer dollars available for seed investments, thus exacerbating the capital gap for seed and start-up capital in the United States,” Sohl said.
Based on observations within the UK markets, it is likely the activity of women angels is still lagging behind the US. This is something expected to only increase as opportunity and awareness grows within the women angel community and a more statistical representation is hopefully on its way. In the US, women angels represented 13.8 percent of the total angel market. Women-owned ventures accounted for 12.9 percent of entrepreneurs seeking angel capital, and 21.5 percent of these women entrepreneurs received angel investment in 2006. Minority angels accounted for 3.4 percent of the angel population, and minority-owned firms represented 6.9 percent of entrepreneurs who presented their business concept to angels. Compounding this low participation rate, the yield rate for minority-owned firms was 7.1 percent, which is close to twothirds below the general yield rate.
The Center for Venture Research (CVR) has been conducting research on the angel market since 1980. The CVR’s mission is to provide an understanding of the angel market and the critical role of angels in the early stage equity financing of high growth entrepreneurial ventures. Through the tenet of academic research in an applied area of study, the CVR is dedicated to providing reliable and timely information on the angel market to entrepreneurs, private investors and public policymakers.
Source: University of New Hampshire – Center for Venture Research Center for Venture Research
University of New Hampshire
The Whittemore School of Business and Economics
15 College Road
Durham, New Hampshire, USA
03824-3593
Email: cvr@unh.edu
